Is Carnival plc’s (LON:CCL) Stock Available For A Good Price After Accounting For Growth?

Carnival plc (LON:CCL) is considered a high-growth stock, but its last closing price of £39.25 left some investors wondering if this high future earnings potential can be rationalized by its current price tag. Below I will be talking through a basic metric which will help answer this question.

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View our latest analysis for Carnival

What can we expect from Carnival in the future?

Analysts are predicting good growth prospects for Carnival over the next couple of years. The consensus forecast from 8 analysts is certainly positive with earnings per share estimated to rise from today’s level of $4.405 to $5.761 over the next three years. On average, this leads to a growth rate of 11% each year, which signals a market-beating outlook in the upcoming years.

Can CCL’s share price be justified by its earnings growth?

Carnival is trading at quite low price-to-earnings (PE) ratio of 11.3x. This tells us the stock is undervalued relative to the current GB market average of 16.22x , and undervalued based on its latest annual earnings update compared to the Hospitality average of 18.19x .

LSE:CCL Price Estimation Relative to Market, May 27th 2019
LSE:CCL Price Estimation Relative to Market, May 27th 2019

Carnival’s price-to-earnings ratio stands at 11.3x, which is low, relative to the industry average. This already suggests that the stock could be undervalued. But, to properly examine the value of a high-growth stock such as Carnival, we must reflect its earnings growth into the valuation. I find that the PEG ratio is simple yet effective for this exercise. A PE ratio of 11.3x and expected year-on-year earnings growth of 11% give Carnival an acceptable PEG ratio of 1.05x. This tells us that when we include its growth in our analysis Carnival’s stock can be considered slightly overvalued , based on its fundamentals.

What this means for you:

CCL’s current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you’re a potential investor, now may not be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:

  1. Financial Health: Are CCL’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  2. Past Track Record: Has CCL been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of CCL’s historicals for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.